By Lilian Chovin, Head of Asset Allocation
- Our investment process is signalling a more balanced phase of the cycle. Policy is becoming less supportive and financial conditions are gradually tightening, reducing some of the tailwinds that have supported equities.
- We are therefore trimming our equity overweight and reallocating toward bonds. Within equities, we are reducing our US exposure to slightly below benchmark weight. We are also closing our overweight to domestically oriented cyclical stocks in the UK and returning to our benchmark weight.
- Bonds now offer a more attractive balance of risk and return. Higher yields improve forward-looking returns and restore some defensive value, particularly if economic growth disappoints or geopolitical risk escalates. Our reallocation to bonds is therefore both a risk-reduction step and an opportunity to capture more attractive yields.
Global equities have continued to benefit from resilient economic growth, solid earnings, and enthusiasm around artificial intelligence (AI), despite a challenging geopolitical backdrop. However, our investment process, which analyses the business cycle through indicators such as expected changes in GDP growth, inflation trends, and policy actions, is now sending a more cautious signal. Policy is becoming less supportive, financial conditions are tightening, and the reward for holding equities has become slightly less attractive.
Importantly, we still see economic growth ahead, and no recession on the horizon, and so we remain overweight equities relative to our benchmarks. We do not see today’s environment as a repeat of 2022, when severe inflation and policy shocks forced a rapid and synchronised tightening cycle around the world, pressurising both equities and bonds. In contrast markets have this year moved from expecting easier policy from central banks to pricing a higher-for-longer interest rate path, creating a headwind for equity valuations, cyclical assets, and long-duration growth sectors — particularly in the US, where valuations are already elevated relative to historical averages.
Balanced response to new policy signals
Our response is deliberately balanced. The cycle remains sufficiently constructive to stay overweight equities but is no longer strong enough to justify the same level of risk.
We are therefore trimming our equity overweight and reallocating toward bonds. Within equities, we are reducing our US exposure to slightly below benchmark weight.
We are also closing our overweight to domestically-oriented cyclical stocks in the UK — including industrials, consumer discretionary and financials — and returning to our benchmark weight.
Bonds now offer a more attractive balance of risk and return. Higher yields improve forward-looking returns and restore some defensive value, particularly if economic growth disappoints or geopolitical risk escalates. Our reallocation to bonds is therefore both a risk-reduction step and an opportunity to capture more attractive yields.
The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs. This article should not be taken as advice.
Monetary policy is no longer a tailwind
Our investment process captures shifts in the expected stance of monetary policy by combining market-implied rate expectations with central bank balance sheet dynamics. It is designed to identify meaningful changes in the policy backdrop before they are fully reflected in economic data or actual central bank decisions.
Through this process, we have seen a clear change since March. Through late 2025 and early 2026, interest rate expectations were relatively stable, supported by resilient economic growth and disinflation. That changed after the outbreak of the Middle East crisis and the associated energy shock, which pushed expectations for interest rates in the US meaningfully higher.
